Buy My Book Here

Fox News Ticker

Please check out my new books, "Prosecutors Gone Wild: The Inside Story of the Trial of Chuck Panici, John Gliottoni, and Louise Marshall"
and also, "The Definitive Dossier of PTSD in Whistleblowers"

Tuesday, April 13, 2010

L, U, V, or W

Recently, there's been several high profile pieces that have set off the debate about what sort of recovery we are in. First, we had this surprising piece by Larry Kudlow.

Sometimes you have to take out your political lenses and look at the actual statistics to get a true picture of the health of the American economy. Right now, those statistics are saying a modest cyclical rebound following a very deep downturn could actually be turning into a full-fledged, V-shaped, recovery boom between now and year-end.

I’m aiming this thought especially at many of my conservative friends who seem to be trashing the improving economic outlook — largely, it would appear, to discredit the Obama administration.

Don’t do it folks. It’s a mistake. The numbers are the numbers. And prosperity is awelcome development for a nation that has suffered mightily.

Kudlow cites recently strong GDP, employment, stock market, and manufacturing as all evidence that we are in V shaped recovery, the strongest recovery.

Meanwhile, Daniel Gross wrote a long dissertation about how American ingenuity will lead to a robust recovery.

But the long-term decline of the U.S. economy has been greatly exaggerated. America is coming back stronger, better, and faster than nearly anyone expected—and faster than most of its international rivals. The Dow Jones industrial average, hovering near 11,000, is up 70 percent in the past year, and auto sales in the first quarter were up 16 percent from 2009. The economy added 162,000 jobs in March, including 17,000 in manufacturing. The dollar has gained strength, and the United States is back to its familiar position of lapping Europe and Japan in growth. Among large economies, only China, India, and Brazil are growing more rapidly than the United States—and they're doing so off a much smaller base. If the U.S. economy grows at a 3.6 percent rate this year, as Macroeconomic Advisers projects, it'll create $513 billion in new economic activity—equal to the GDP of Indonesia.

So what accounts for the pervasive gloom? Housing and large deficits remain serious problems. But most experts are overlooking America's true competitive advantages. The tale of the economy's remarkable turnaround is largely the story of swift reaction, a willingness to write off bad debts and restructure, and an embrace ofefficiency—disciplines largely invented in the United States and at which it still excels. America still leads the world at processing failure, at latching on to new innovations and building them to scale quickly and profitably. "We are the most adaptive, inventive nation, and have proven quite resilient," says Richard Florida, sociologist and author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. If these impulses are embraced more systematically and wholeheartedly, the United States can remain an economicsuperpower well into the current century.

So what will our new economy look like once the smoke finally clears? There will likely be fewer McMansions with four-car garages and more well-insulated homes, fewer Hummers and more Chevy Volts, less proprietary trading and more productivity-enhancing software, less debt and more capital, more exported goods and less imported energy. Most significantly, there will be new commercial infrastructures and industrial ecosystems that incubate and propel growth—much as the Internet did in the 1990s.

The Great Recession has accelerated a structural shift in the economy that had been slowly building for years. Companies have used the downturn to aggressively trim payrolls, making cuts they've been reluctant to make before. Outsourcing abroad has increased dramatically. Companies have discovered that new software and computer technologies have made many workers in Asia and Latin America almost as productive as Americans, and that the Internet allows far more work to be efficiently moved to another country without loss of control.

Companies have also cut costs by substituting more computerized equipment for labor. They've made greater use of numerically controlled machine tools, robotics and a wide range of office software.

These cost-cutting moves have allowed many companies to show profits notwithstanding relatively poor sales. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. It managed this largely by cutting 28,000 jobs, 32% of its work force. But for workers, there's no return. Those who have lost their jobs to foreign outsourcing or labor-replacingtechnologies are unlikely ever to get them back. And they have little hope of finding new jobs that pay as well. More than 40% of today's unemployed have been without work for over six months, a higher proportion than at any time in 60years.

The only way many of today's jobless are likely to retain their jobs or get new ones is by settling for much lower wages and benefits. The official unemployment numbers hide the extent to which American workers are already on this downward path. But if you look at income data you'll see the drop.

A V shaped recovery is when the economy recovers robustly. So, there's a recession, that's the first side of the V, and then a recovery, the second side. 2001-2003 was a great example. A U shaped recovery means that the recovery is much slower and more painful. An a L shapped recovery means we bottom out and stay there. Japan in the 1990's is the best example. W means we recover and then before we fully recover we slide back into recession. 1933-1938 is the best example of that.

For what it's worth, I am taking the easy way out. It's still impossible to know. While we've had some robust economic numbers, it's early. We also just ended a massive round of quantitative easing. Will the economy continue to recover without that stimulus? No one knows for sure.